Free Reserves

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DEFINITION

A measurement of a bank's reserves that is equal to the difference between borrowed reserves and excess reserves. This is the amount which the bank has available to lend to clients. A bank is required by federal law to hold a specific amount of reserves at any given time. The excess reserves are calculated by subtracting the required reserves from the total reserves it holds.

INVESTOPEDIA EXPLAINS

The Federal Reserve can alter the available credit held by commercial banks by either selling or purchasing securities in the open market or by increasing the amount of required reserves to be held by commercial banks. In addition, banks can increase their reserves by borrowing directly from the Fed.


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